Answering Client FAQs: Are We Heading For A Recession?
I've been spending a lot of time lately in meetings with clients, listening to a myriad of concerns about everything from the market to the economy to politics. Inflation and recession fears are also common topics these days. I thought it would be good idea to pen down some thoughts to help make sense of the current situation.
It's undeniable that we're living in complex times. There's been a whirlwind of activity from the government—massive spending, borrowing, and yes, printing trillions of extra dollars. These measures have injected a kind of artificial vitality into the economy. Picture it like giving morphine to an accident victim—it might mask the pain, but once it wears off, the reality of the situation resurfaces.
Looking at economic data from November and December 2022, we saw weaker growth. Yet, in January 2023, things seemed to pick up, showing a robust economic performance. Some might find these patterns perplexing, and I don't blame them. The impacts of COVID-19, government shutdowns, and the subsequent fiscal policy responses have certainly muddled our seasonal patterns.
But let's not jump the gun here. Before drawing firm conclusions, it's essential to observe several months' worth of data. It's likely we'll see periods of both strong and weak data in the near future. Patience and observation, my friends, are the keys.
As for the question of a looming recession, in my view, it's inevitable once the effects of the economic stimulus wear off and the effects of the rate hikes kick in. While I can't give you an exact timeline or predict the severity, I firmly believe we'll have to pay the price for the stimulus measures eventually.
I'd be remiss if I didn't address the question many of you have been asking: Are we currently in a recession? To answer that, I think we need to look beyond the conventional definition of a recession—two consecutive quarters of negative GDP growth. The National Bureau of Economic Research (NBER) considers multiple factors, not just GDP growth, when determining a recession.
Interestingly, five out of six key indicators, including personal income, payroll employment, civilian employment, consumption, retail sales, and industrial production, show positive trends. According to the New York Times, job growth has been strong, with an average of 450,000 jobs added per month in the first half of the year. Also, they stated that a solid 70% of companies in the S&P 500 have reported growth, beating their estimates.
Yes, the economy may be softening, and we've seen some unusual numbers, such as the 30% increase in retail sales since 2020. But these are the side effects of the unprecedented lockdown measures taken during the pandemic.
While I acknowledge the possibility of a future recession, potentially within the next 6 to 12 months—especially if the Federal Reserve hikes interest rates too high—I want to emphasize that this is a future projection and not the current state of the economy.
I urge you to look beyond media speculation and rely on hard facts. Let's not label our current situation as a recession based on a couple of quarters of negative GDP growth. We need to look at the bigger picture and multiple economic indicators. As always, in uncertain times, staying the course is crucial.
Thank you for taking the time to read this. If you have any questions, concerns or comments, please feel free to reach out. We're all in this together, and I'm here to help make sense of these challenging times. Remember, helping you feel confident in your financial plan is at the heart of everything we do at Green Financial Group.
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